Edited version of private advice

Authorisation Number: 1052379141823

Date of advice: 28 March 2025

Ruling

Subject: Annual turnover

Question 1

Are the Insurance Proceeds received for the loss of an item of trading stock included in determining the annual turnover of the Partnership?

Answer 1

No.

This ruling applies for the following periods:

Year ending XX March 20XX

Year ending XX March 20XX

The scheme commenced on:

XX April 20XX

Relevant facts and circumstances

The Partnership carries on a primary production business which involves animal breeding.

The Partnership acquired an interest in a thoroughbred in order to breed and sell progeny.

The owners had taken out insurance.

The animal was diagnosed with a disease.

The diagnosis was that the long-term prognosis was hopeless and that humane euthanasia was warranted.

Due to the prognosis the owners made the decision to have the animal euthanised.

The insurance company settled the owners claim for the animal and the Partnership received its share of the insurance proceeds (Insurance Proceeds).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 70-115

Income Tax Assessment Act 1997 section 328-120

Reasons for decision

Summary

The insurance proceeds are either statutory income or are ordinary income derived outside the ordinary course of the Partnership's business. The insurance proceeds are not included in determining the Partnership's annual turnover.

Detailed reasoning

An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business (subsection 328-120(1) of the ITAA 1997).

As such, for an amount to be included in an entity's annual turnover it must be both:

•          ordinary income, and

•          derived in the ordinary course of carrying on a business.

Insurance proceeds for loss of trading stock

Insurance proceeds for the loss of an item of trading stock are assessable as ordinary income (section 6-5 of the ITAA 1997), or as statutory income (section 70-115 of the ITAA 1997) when they are not ordinary income.

Ordinary income

Ordinary income is defined to mean income according to ordinary concepts (section 6-5 of the ITAA 1997).

Ordinary income has generally been held to include income from providing personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

•          are earned

•          are expected

•          are relied upon, and

•          have an element of periodicity, recurrence or regularity.

In the ordinary course of carrying on a business

The definition of 'annual turnover' in subsection 328-120(1) of the ITAA 1997 was inserted into the ITAA 1997 by the Tax Laws Amendment (Small Business) Act 2007 (TLASBA 2007). The Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007, which Bill was ultimately enacted as the TSLABA 2007 provides:

What does 'in the ordinary course of carrying on a business' mean?

2.14 The phrase 'in the ordinary course of carrying on a business' is not defined in income tax law. It must therefore be interpreted according to its ordinary meaning.

2.15 In general, income is derived in the ordinary course of carrying on a business if the income is of a kind that is regularly or customarily derived by the entity in the course of carrying on its business, arising out of no special circumstance or unusual event. Similarly, the income is derived in the ordinary course of carrying on a business if the income, although not regularly derived, is a direct result of the normal activities of the business.

2.16 Ordinary income may be derived in the ordinary course of carrying on a business even if it is not the main type of ordinary income derived by the entity. Similarly, the income does not need to account for a significant part of the entity's overall receipts. It is sufficient that the ordinary income is of a kind derived regularly or customarily in the carrying on of a business.

Amounts that are not ordinary income

An amount is included in assessable income if it is:

(a)     ved by way of insurance or indemnity for a loss of trading stock, and

(b)     ssessable as ordinary income (section 70-115 of the ITAA 1997).

The Explanatory Memorandum to the Tax Law Improvement Bill 1997 explains the rewritten provisions (about trading stock) in Division 70 of the ITAA 1997 and provides:

Guide to Division 70: Tax accounting for trading stock

What is trading stock?

Trading stock is the things (eg. goods, land, intangible property) in which a business trades. Trading stock includes the raw materials and partially finished products that a manufacturer will convert into finished goods for trading. It also includes live stock.

What happens if the stock is lost?

Insurance payments are normally assessed as ordinary income under section 6-5. If any such payments are not ordinary income, they will be assessed on receipt [under section 70-115 of the ITAA 1997].

Section 70-115 Compensation for lost trading stock

This section will include in assessable income an insurance or indemnity amount if:

•          it is for the loss of trading stock, and

•          it is not ordinary income.

Change

The rewritten provision will only assess amounts that are not ordinary income.

Explanation

Insurance and indemnity amounts for the loss of trading stock will generally, and perhaps always, be assessed as ordinary income. If there are any amounts that are not ordinary income, they will be assessable under this provision.

The exclusion of ordinary income makes it clear that the section does not modify the ordinary tax accounting treatment of insurance and indemnity amounts for a loss of trading stock.

Conclusion

The insurance proceeds received for the loss of the animal are assessable as ordinary income under section 6-5 of the ITAA 1997, or as statutory income under section 70-115 of the ITAA 1997.

Should the insurance proceeds be assessable as statutory income under section 70-115 of the ITAA 1997 they would not be included in determining the annual turnover of the Partnership as statutory income is not included in annual turnover.

While the animal, is treated as trading stock for income tax purposes she was not being held for resale like most other animals; rather, it was being held in order to breed from and sell progeny. The Partnership did not intend to stop holding the mare. It was only following the diagnosis that the long term prognosis was hopeless that the owners made the decision to euthanise her.

It is the Commissioner's view that the insurance proceeds were received because of a special circumstance or unusual event. As such, even if the insurance proceeds were of a kind regularly or customarily derived by the Partnership they were not derived in the ordinary course of business.

As the insurance proceeds were derived outside the ordinary course of the Partnership's business, even if they were assessable as ordinary income under section 6-5 of the ITAA 1997, they would not be included in determining its annual turnover as only ordinary income derived in the ordinary course of a business is included.